NEW YORK (AP) – Now even the professionals on Wall Street are asking if the stock market has shot too high.
US stocks have rallied higher almost non-stop since March, surging about 70% to record highs, leading outsiders to say the market had lost touch with the reality of the pandemic. But Wall Street continued to justify the gains by pointing to massive support from the Federal Reserve, lifesaving liberation from COVID-19 vaccines, and efforts by Congress to pump more stimulus into the economy.
Lately, however, some of the market’s actions have become more difficult to explain, and not just the maniacal moves for GameStop. Some investors are so hungry for massive payouts that they are plunging into investments without knowing where their dollars will go. And by some measures, the broad stock market looks more expensive than it did before the 1929 crash.
Wall Street is openly debating whether the market is in a dangerous bubble, after wiping out the possibility for months.
A bubble is what happens when the prices for something are much, much higher than rationally should be: They are a regular occurrence throughout history, going back to tulips in the 17th century and pets.com in the late 20th century.
“As a market historian, it is a privilege to experience another major equity bubble,” wrote renowned value investor Jeremy Grantham, rightly citing several key market turning points, in a recent article. “Japan in 1989, the tech bubble of 2000, the housing and mortgage crisis of 2008 and now the current bubble – these are the four most important and most poignant investment events of my life.”
Sure enough, most professional forecasters say the US stock market is not headed for a crash, just slower returns than before. But those optimists have to do more work to convince others.
“You could say that a bubble is formed when people think the market will rise but fear it will fall,” said Robert Shiller, a Yale professor who won a Nobel Prize for his work on controlling stock price movements. to declare. “That’s where we are.”
He said the market looks fragile, but he cautioned that some characteristics of a classic bubble are not present today, such as investors talking about a “new era” for the economy. He also said it is difficult to predict when the market will lose momentum and get lower.
“People often extrapolate trends, and they go on longer than you ever think,” he said. “And then they disappear.”
Here’s a rundown of the reasons for concern driving the bubble debate:
DAY TRADING FRENZY
The most glaring example of Wall Street redundancy now is GameStop’s stock, which rose 1,625% in January. Shares of the struggling video game retailer have since fallen, but they remain well above a price Wall Street analysts say is rational based on its earnings outlook. Other money-losing companies have also risen sharply, showing how easily some investors drive up prices for an investment, despite the risks. And because smaller investors are driving most of the action, experts are comparing to the shoe shiner who gave stock tips in 1929.
NO DISCOUNTS TO BE FOUND
Perhaps more worryingly, stock market prices have risen much faster than corporate earnings. The two tend to follow each other over the long haul, so major dissociations pause. A measure popularized by Yale’s Shiller looks at the price of the S&P 500 against the profits made by companies over the past 10 years, adjusted for inflation. Since 1881, it has only been more expensive than it is today – during the dot-com bubble. It got close just before the crash that helped usher in the Great Depression.
IPWhoa
– Massive support from the Federal Reserve means dollars are sloshing around markets looking for investment, and young and money-losing companies are rushing to profit by selling their shares to the public for the first time. Companies raised more than $ 60 billion through IPOs of their shares last year, the highest number since the dotcom bubble peaked in 2000, according to data collected by Jay Ritter of the University of Florida. Within technology companies, only 19% of IPOs last year were for profitable companies, compared to the more typical 49% of the past two decades.
SPACE, CRACKLE, POP?
– The eagerness to invest in the next hot young company is so gluttonous that some CEOs skip the IPO move altogether. Instead, they sell themselves to companies armed with cash by investors whose job it is to find fledgling companies that do not yet have shares traded in the public market. Such specialty acquisition companies, or SPACs, have become extremely popular. Last year, SPACs raised $ 76 billion from investors, up from $ 13 billion a year earlier. In the first three weeks of 2021, they have raised an additional $ 16 billion, according to Goldman Sachs.
Despite all the concerns, much of Wall Street is still optimistic and predicts even more gains.
COVID-19 vaccines have raised expectations that everyday life will get closer to normal this year and restore the economy to health. When earnings are up a lot and stock prices are only modestly moving, prices look more reasonable, which is exactly what Wall Street expects.
In early 2018, the market was in the midst of a long and vigorous run, and some measures made the S&P 500 almost as expensive as it is today, causing a bubble. However, the bull market continued until the pandemic hit.
Then there is the Fed. Past air bubbles have burst after the Federal Reserve started hike interest rates in hopes of cooling an overheated economy or markets. For now, the Fed seems to be years away from that. In fact, it is said for the first time that it is willing to keep interest rates low for a while after inflation is above the 2% target.
With interest rates so low, investors don’t have much choice outside of equities for good returns.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed has pretty much signaled to Wall Street that it will not allow a major market downturn.
“As long as interest rates are so low,” she said, “it’s really hard for me to see how you could have a big correction in stocks.”